The Supreme Court will consider next week whether the Securities and Exchange Commission’s (SEC) use of in-house judges violates the right to a jury trial guaranteed in the Seventh Amendment.
Congress empowered the SEC to use its own in-house administrative law judges (ALJs) to try cases brought by agency enforcement when it passed the Dodd-Frank Act following the 2008 financial crisis. George R. Jarkesy, who has been caught in the SEC’s administrative proceedings since the agency charged him with fraud relating to his investment activities in 2013, challenged that grant of power as unconstitutional.
The Fifth Circuit found in 2022 that the SEC’s in-house adjudication process violated Jarkesy’s right to a jury trial. It also held that the removal restrictions that secure ALJs with multiple layers of protection and Congress’ delegation of legislative power to the SEC were unconstitutional.
The Supreme Court will consider those three issues in the case, SEC v. Jarkesy, on Wednesday.
Jarkesy and the investment advisor, Patriot28, were initially charged with violating the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940, according to court documents.
The SEC ordered them to pay a $300,000 civil penalty, alleging that they “misrepresented who served as the prime broker and as the auditor,” “misrepresented the funds’ investment parameters and safeguards” and “overvalued the funds’ assets to increase the fees that they could charge investors.”
Solicitor General Elizabeth Prelogar wrote in the government’s petition that the Seventh Amendment does not apply to “administrative adjudications conducted by federal agencies.”
The majority of cases that come before administrative law judges involve people seeking government benefits and do not require a jury trial, New Civil Liberties Alliance Senior Litigation Counsel Peggy Little told the Daily Caller News Foundation. But in other cases where the government is suing an individual for damages that put “life, liberty, reputation, or property” at risk, that person is entitled to a trial by jury, she said.
Jarkesy’s attorneys argue that the lower court’s decision “merely affirmed our constitution’s intrinsic limits on unconstrained executive power.” (RELATED: Woman Wins Years-Long Battle Against Regulator, Dealing Blow To Administrative State)
“Civil juries in particular have long served as a critical check on government power,” Jarkesy’s brief states. “So precious were civil juries at the time of the Founding that the Constitution likely would not have been ratified absent assurance that the institution would be protected expressly by amendment.”
The SEC “virtually always wins in its own home courts,” his lawyers noted.
“At the time of Jarkesy’s ‘trial’ in 2014, the agency had, over the last 200 contested cases, compiled an in-house win rate of exactly 100%, contrasted with a less pristine 61% success rate over the same time period in Article III courts, where juries are employed,” the brief states.
WASHINGTON, DC – JANUARY 31: A man walks up the steps of the U.S. Supreme Court on January 31, 2017 in Washington, DC. (Photo by Mark Wilson/Getty Images)
In an amicus brief, former U.S. Attorney General Edwin Meese III and other constitutional originalist scholars, Steven Calabresi and Garry Lawson, wrote it is “Orwellian and terrifying” to argue that jury trials are not necessary when the government is a party to the case.
Jury trials “are even more essential in securities fraud cases to which the federal government, with its enormous financial and litigation resources, is a party,” they argued.
The Supreme Court ruled in April that individuals facing complaints from the SEC and the Federal Trade Commission (FTC) can bring constitutional challenges directly in federal court, rather than going through the agency’s administrative proceedings.
In a statement last year, the SEC announced a “control deficiency” that had allowed agency enforcement officials to access documents that should have been restricted to staff tasked with ruling on the cases, breaching the separation between the agency’s prosecutorial and judicial functions. The agency pointed to the breach in June when it dropped 42 cases.
“[T]he administrative prosecutors and the administrative law judges are not independent,” Little told the DCNF. “They work so closely together, and there’s a sort of a built in structural bias.”
Michael McColloch and Karen Cook, attorneys representing Jarkesy, did not respond to a request for comment.
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